Asia's Tech Concerns Aim to Stay Nimble

As the global business environment presents new challenges, Chinese and Indian tech companies are reassessing their goals and strategies

by Bruce Einhorn

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Shanghai-based Grace Semiconductor Manufacturing started business early this decade with high hopes of becoming a global leader in the chip industry. Back then, China's rulers were keen on building the country's high-tech industry and money was flowing to new Chinese chipmakers investing billions of dollars in advanced semiconductor facilities. At the same time, Chinese companies making everything from cell phones to software dreamed of taking on giants like Motorola (MOT) and Microsoft (MSFT).

Today, executives at Grace have more modest goals. The privately held company (it does not release sales or profit numbers) is a foundry, which means it makes chips on a contract basis for customers that want to outsource their production. Unlike big foundries in Taiwan or Singapore, Grace still operates a single chipmaking factory, with a monthly capacity of just 35,000 wafers. That's just a fraction of what industry leaders such as Taiwan Semiconductor Manufacturing manage. And while TSM and others operate several cutting-edge factories making wafers that are 12 inches in diameter, Grace is sticking with more mature technologies and smaller sizes.

Grace Executive Vice-President and Chief Financial Officer Daniel Wang says there's no shame in having goals that aren't quite so lofty. "Anyone going head-to-head with big foundries will only be able to compete on price, and that is too difficult a battle for a startup company," he explains. Over the past two to three years, he adds, it became "very evident to us that we need to focus on things where we can have value added." For Grace, that means finding niche markets, such as making chips with embedded flash technology for customers including Cypress Semiconductor (CY) and Marvell Technology (MRVL). "We need to focus on things that are, at the end of the day, profitable for the company," says Wang.

Strategizing and Overcoming Obstacles

In China, as well as in India, many technology executives are reassessing their strategies now. Both countries have booming economies growing at or near 10% a year. That has helped local tech companies build critical mass and start spreading their wings worldwide. In China, companies such as Lenovo, Huawei Technologies, and China Mobile have parlayed their home strengths into platforms for global expansion. In India, software-services companies such as Tata Consultancy Services, Wipro (WIT), and Infosys Technologies (INFY) have enjoyed strong earnings growth serving Western customers.

But companies in both Asian countries are now facing tough new challenges. Of course, both Chinese and Indian tech companies have to cope with the fallout from the subprime mess in the U.S. and the possibility that the housing crisis might lead to slower American growth or even a recession.

Moreover, in China, companies such as Grace are finding it's harder to become first-tier players than many optimistic investors might have thought a few years ago. Competition in the domestic PC industry is heating up as multinationals such as Hewlett-Packard (HPQ) and Dell (DELL) focus on trying to win some market share from local champ Lenovo (BusinessWeek, 4/2/07).